Two of City Hall’s most-talked-about problems – erroneous water bills and the lack of reliable audits – have spilled over and merged into one another, resulting in a fresh drain on taxpayer funds.

This week the Board of Estimates approved an extra $444,025 to Ernst & Young to reconcile financial statements that go to national rating agencies and municipal lenders. That’s on top of the $542,000 the board awarded to Ernst & Young last December due to a finance department error.

The latest expenditure mostly stems from the city’s archaic water meter billing system, but you wouldn’t know it from reading the board’s agenda.

The spending item was submerged on page 83 of the board’s 119-page agenda and offered this explanation: “Due to unanticipated issues, Ernst & Young has requested an increase to complete . . . the City’s Comprehensive Annual Financial Report for Fiscal 2010.”

Nor was clarification forthcoming from the board itself.

Led by Mayor Stephanie Rawlings-Blake and her two appointees, the panel passed the increase, along with about 40 other spending items, on the “routine” agenda, which allows for a group vote without discussion. Time lapsed to pass the routine agenda: about two minutes.

Pressed for transparency after the meeting, Finance Director Harry E. Black acknowledged that the Ernest & Young payment was not so unanticipated after all.

It revolved around reconciling water bill accounts, such as the city’s overcharging of 38,494 customer accounts over the three years (which resulted in $4.3 million in refunds) and its failure to recover money owed by large institutions (such as $5.4 million unpaid by now-bankrupt RG Steel for industrial water going to the Sparrows Point steel mill).

Water Affects City’s Financial Standing

Dismissed, delayed and discredited for years, the water bill fiasco is now cascading into questions over the city’s financial recordkeeping.

Water utility and other capital debt funds are required by law to operate on a self-sustaining and reliable basis. Big banks and other municipal lenders don’t take kindly to material errors in these accounts, especially when Baltimore is planning to borrow about $1 billion to modernize its aging water and sewage network.

CAFR is a broad-brush financial report that reconciles the city’s various capital accounts and does not get into the nitty-gritty of agency spending. The latter task won’t begin until 2014 under the charter amendment approved by the City Council last month.

The credibility of CAFR was thrown into question last September when former finance director Edward Gallagher revealed that the city had misclassified some fixed assets in its published statements.

At that time, Gallagher described the matter as a technical accounting matter that will “have no impact on the day-to-day operation of the city” and was best left to his office – much like citizen complaints over water bills had been handled for years by the water bureau.

Gallagher said the matter would be cleared up by the end of 2011.

Now it’s clear that the city has a way to go to fix these problems. Not only is the 2010 CAFR flawed, but 2011 statement is undergoing a review of its water billing accounts.

So far, the city has paid another accounting firm – KPMG – $124,800 to correct the beginning balances of the 2011 CAFR. Additional auditing for 2011 is still needed, Black acknowledged.

His remarks echo what City Comptroller Joan Pratt said last month on a radio talk show: “it’s not over yet.”

All of which means more money will be flowing to outside accountants to look at the water bureau’s books and less attention paid to other agency accounts by the city’s internal audit department supervised by Pratt.